Our next witness will be Mr. Clifford C. Sommer, president of the Security Bank and Trust Co., Owatonna, Minn., and also vice president of the American Bankers Association, and Mr. Carl W. Desch, senior vice president and cashier at the First National City Bank and representing the New York Clearinghouse.

Since these gentlemen represent the banking industry, we will ask that they appear together and read their statements and remain at the witness table for questioning, please. Just have a seat, gentlemen.

Mr. Sommer, you may identify yourself and also the gentleman accompanying you and proceed in your own way, sir.

STATEMENT OF CLIFFORD C. SOMMER, VICE PRESIDENT, THE AMERICAN BANKERS ASSOCIATION; ACCOMPANIED BY WILLIAM HEFFELFINGER, STAFF REPRESENTATIVE, AMERICAN BANKERS ASSOCIATION

Mr. SOMMER. Thank you very much, Mr. Chairman. I am here on behalf of the American Bankers Association. Mr. Heffelfinger behind me will support me in any questions that might come up. With that I will proceed with my testimony, if you so desire.

Mr. Chairman, members of the committee, I am Clifford C. Sommer, president of the Security Bank and Trust Co., Owatonna, Minn., and also vice president of the American Bankers Association.

The American Bankers Association, on behalf of its member banks, appreciates this opportunity to express its views on H.R. 15073, which has as its main objectives the prescription of procedures designed to aid duly constituted authorities in lawful investigations, and to prevent the premature destruction of certain types of evidence having a high degree of usefulness in the establishment of civil and criminal liabilities.

Let me emphasize at the outset that we are in complete agreement with the objectives of H.R. 15073. The American Bankers Association desires to cooperate to the maximum extent possible with law enforcement agencies. Past experience demonstrates that commercial banks have worked closely with Federal law enforcement agencies. The Commissioner of Internal Revenue in his testimony before the committee on December 10, 1969, confirmed this fact. We wish to continue and make more effective this cooperative effort.

Mr. Chairman, may I add a bit?

Chairman PATMAN. Yes, sir.

Mr. SOMMER. I would like to add this point to my prepared statement, that I did listen with a great deal of interest to the suggestions made by the Assistant Secretary of the Treasury earlier today. After we have had an opportunity to study these suggestions, we would like to supply for the record any further comments we can.

Chairman PATMAN. We shall be very glad to have your comments and you may without objection have them inserted in connection with your remarks.

Mr. SOMMER. Yes. My first impression is that many of them are constructive, and will furnish solutions to some of the problems that we raise.

I would also like to call attention to the fact that commercial banks have a real interest in the apprehension of criminals and the control

of their activities because banks have suffered heavy losses from their activities, with resultant increases in costs to the entire banking industry.

We are concerned, however, that the pending bill would require the creation of an unnecessarily elaborate system of records and reports which banks and other financial institutions would be required to file and maintain without regard to whether such records are needed in the operation of such institutions or are reasonably directed toward law enforcement activities.

Banks have an obligation to their customers to maintain the privacy of their personal financial affairs except in response to subpoena or other regular legal process. The maintenance of individuals' right of privacy has also quite properly been a matter of concern to the Congress. One concrete example of this concern is shown in H.R. 12582, a bill to protect the privacy of depositors at insured banks and other institutions, introduced by Mr. McClure and referred to your committee.

When action is taken on H.R. 15073 we urge that information made available to law enforcement agencies from bank records be confined to the records of those persons who are subject to active investigation and only in response to subpena or comparable legal process. This would protect the rights of the individual and the responsibility of the financial institutions and would be consistent with long-recognized principles of law.

Turning now to the provisions of H.R. 15073, we offer the following

comments:

TITLE I, BANK RECORDS

Under sections 101 and 122 of H.R. 15073 all banks would be required to make, in accordance with regulations of the Secretary of the Treasury "a record of each check, draft, or similar instrument received by it for deposit or collection, together with an identification of the party for whose account it is to be deposited or collected."

The above-quoted provision in section 21(d) (2) appears to require a record of each check without authorization for the Secretary to exempt any checks from this requirement.

This provision of law imposes recordkeeping requirements substantially beyond existing bank practice. Banks maintain in a manner sufficient to serve their needs records of the amounts of deposit in and checks drawn on the accounts of their customers, and many banks retain for short periods of time photocopies of checks drawn on such accounts. However, many banks do not make or retain photocopies or detailed records of all checks on other banks which are deposited with them. The estimated number of checks drawn on accounts in commercial banks in the United States amount to about 20 billion in 1968, and are estimated to increase to about 22 billion in 1970.

It is possible that, on the average, a check may pass through two or even three banks before final payment. This could result in recording up to 50 billion items throughout the banking system each year. To the extent that banks do not now require this vast volume of records for their own needs, new procedures, with much time and expense, would be required."

Section 101 of the bill might be interpreted to require banks to maintain records of a large number of other financial instruments,

such as notes, mortgages, bonds, coupons, et cetera, received from their customers for collection and credit to their accounts. We do not have any estimate of the aggregate number of such items clearing through the banking system in the course of a year, but we know that the number is great. Information concerning such collection items is now maintained by banking institutions and can be made available to the Secretary from existing records.

Information returns on form 1099 already are filed with the Internal Revenue Service on collection items which involve the collection of interest, rents, et cetera, in amounts of $600 or more.

In addition, the provision of section 21 appears broad enough to cover each check drawn by foreign nationals on the large number of branches of American banks in foreign countries. It is doubtful whether this is contemplated, or that such records would serve any useful purpose for Federal law enforcement agencies in the United States. The question is raised, however, because it raises other problems for consideration unless the bill is clarified to exclude such checks.

If the bill is applied to accounts of foreign nationals in branches of American banks abroad, it will undoubtedly cause a withdrawal of such accounts to the detriment of out foreign trade.

Also, it should be borne in mind that foreign nationals maintain substantial amounts in accounts with banks in the United States. If these depositors should lose confidence in our banking system, the possible resultant loss in deposit accounts could be a significant detriment to out financial system.

In view of the foregoing, we believe it is important that any legislation give the Secretary of the Treasury authority to provide appropriate exemption from the recordkeeping requirements.

Moreover, we urge that title I should be amended to provide that information from existing records or such additional records as may be required should be made available only with respect to designated

persons.

TITLE II, REPORTS OF CURRENCY AND FOREIGN TRANSACTIONS

Section 221 of H.R. 15073 requires that every transaction involving any domestic financial institution shall be reported to the Secretary of the Treasury at such times, in such manner, and in such detail as the Secretary may require if the transaction involves the payment, receipt, or transfer of U.S. currency in such amounts, denominations, or both, or under such circumstances, as the Secretary shall by regulation prescribe. It is not possible to comment with any preciseness on this section since the magnitude of the reporting requirements will depend upon the kind of reports required under the regulations to be prescribed by the Secretary. The expenses that could be imposed upon banks and other domestic financial institutions could be substantial, even if the Secretary exempts under his regulations transactions which on their face are recognized as legitimate transactions by reputable organizations, such as cash furnished to a company for payroll purposes, or the receipt of cash from operations of toll roads, public utilities, et cetera. Inasmuch as there is $46 billion of U.S. currency outstanding in circulation, we believe a floor on the amount of any single currency transaction that must be reported should be set by the Congress at some reasonable amount.

In lieu of this requirement a possible alternative is that legislation could be drafted in line with the provisions of present Treasury regulations relating to TCR reports title 31, chapter I, section 102.1, Code of Federal Regulations except that it apply to transactions involving $5,000 or more without regard to denominations, and transactions involving any amount which in the judgment of the financial institution exceed those commensurate with the customary conduct of the business, industry or profession of the person or organization concerned.

It is suggested that the provision of section 221 be clarified to make it clear that the currency reporting requirements imposed upon banks and other private entities are also applicable to all officers and agencies of the Government of the United States. Also, section 203 (e) (11) should define more precisely the term "issuer or redeemer of checks***"'

Section 223 of H.R. 15073 provides that banks may be designated by the Secretary to receive reports required to be filed under this legislation by other persons and to transmit such reports as the secretary shall prescribe. Since these reports would be received by the banks as agents of the Government, and assuming that there will be a considerable volume of work, the Secretary should be authorized to reimburse the designated financial institutions for expenses incurred by them.

The full impact of the provisions of sections 231 and 241 with respect to the transportation of currency and coin and financial dealings with foreign financial agencies cannot be ascertained in the absence of the regulations which the Secretary is authorized to prescribe in order to implement them. An initial examination of these requirements leads us to believe that they could raise far-reaching problems affecting our normal financial operations both public and private and our foreign trade with other countries. This further supports our view that the entire subject needs a searching examination before the Congress enacts legislation in this area. I might say as an aside apparently quite a bit of that has been done by the Treasury Department.

If legislation is enacted it is recommended that at least chapter 3 of title II of H.R. 15073, covering the filing of reports of currency imports and exports, be changed to specifically exclude from the reporting requirements inter-bank transactions and transactions involving foreign monetary authorities for official purposes. U.S. currently is widely circulated in many parts of the world and large amounts of such currency is returned to the United States through regular banking channels. Any impediments to the free circulation of such currency could impair confidence in the U.S. dollar as a reserve currency.

It is recommended also that chapter 4, title II, of H.R. 15073, concerning reports of transactions with foreign financial agencies be amended to provide that this chapter be effective not earlier than 6 full calendar months following the month in which the act is approved. This will provide a reasonable time for the Secretary to prescribe the necessary regulations and give the parties involved an opportunity to comment on such proposed regulations and to adapt their operations to the prescribed procedures.

CONCLUSION

The American Bankers Association and a number of individual banks are cooperating with the Treasury task force to arrive at a comprehensive and practical solution to this problem.

We suggest that the committee consider changing H.R. 15073 to give permissive authority to the Secretary to develop regulations rather than to enact the mandatory provisions of H.R. 15073, which would write into the law inflexible provisions which time and experience may prove to be unnecessary or impractical in application.

Finally, consideration might be given to an alternative means of obtaining information on foreign bank accounts—a requirement that each person filing an income tax return furnish information indicating whether he maintains an account in a foreign bank, giving the name and location of each such bank, and the balance therein.

I desire to reemphasize that the members of the American Bankers Association will extend their full cooperation to Federal law enforcement agencies in their efforts to apprehend persons evading paying of income taxes and engaging in other criminal activities. All that we ask is that the Federal agencies set out some practical guidelines or regulations that can be followed by commercial banks without incurring prohibitive expense and without violating the rights of our customers. Mr. Chairman, thank you very much.

Chairman PATMAN. Thank you very much, sir.

We will hear from the next witness, Mr. Desch, on behalf of the New York Clearing House. You are recognized, sir, and you may proceed in your own way. First identify yourself and the gentlemen accompanying you.

STATEMENT OF CARL W. DESCH, SENIOR VICE PRESIDENT, FIRST NATIONAL CITY BANK OF NEW YORK, ON BEHALF OF THE NEW YORK CLEARING HOUSE ASSOCIATION; ACCOMPANIED BY ROY C. HABERKERN, JR., MILBANK, TWEED, HADLEY & McCLOY; AND HENRY HARFIELD, SHEARMAN & STERLING

Mr. DESCH. Mr. Chairman, my name is Carl W. Desch, senior vice president and cashier of First National City Bank, and I appear here today to comment on H.R. 15073.

On my right is Mr. Henry Harfield, of Shearman & Sterling, and on my left is Mr. Roy C. Haberkern, of the firm of Milbank, Tweed, Hadley & McCloy.

The clearing house welcomes this opportunity to appear before your committee, and we hope to dispel what appears to be widespread misunderstandings about what H.R. 15073 does and what position we take with respect to it.

Banks themselves are prime targets of crime, and we strongly support efforts to reduce it. In 1969, the banking industry lost an estimated $200 million as a result of criminal activity. A significant part of this loss stemmed from the activities of criminals operating on an international scale. Security thefts have reached such proportions that many financial institutions are finding it extremely difficult to obtain adequate insurance coverage against losses from such thefts.